If Time is Money Should Business People Use Private Jets?

The long check-in lines, irritating fees, complex routing and lack of confidentiality in conversations has motivated many businesses to use private jets for their executives. One of the issues in acquiring, or chartering a private jet is the tax deductibility of the expense. The rules are that to be deductible, a business expense must be ordinary, necessary and reasonable. These prerequisites have been the subject of significant litigation.

The Supreme Court has indicated that an ordinary expense is one that is "normal, usual, or customary." Deputy v. Du Pont, 308 U.S. 488, 495 (1940). Similarly, the Supreme Court has explained that an expense is ordinary if it is a "common and accepted" expense for the taxpayer, comparing the taxpayer to "the group, the community, of which he is a part." Welch v. Helvering, 290 U.S. 111, 114 [12 AFTR 1456 (1933)]. Expenses are necessary if they are "appropriate and helpful."Id. at 113. For an expense to be considered ordinary and necessary, it must also be reasonable in amount. SeeHarmon City, Inc. v. United States, 733 F.2d 1381, 1383 [53 AFTR 2d 84-1438] (10th Cir. 1984).

First. An expense is ordinary if it is a "common and accepted" expense for the taxpayer, comparing the taxpayer to "the group, the community, of which he is a part."Welch v. Helvering, 290 U.S. 111, 114. The Tax Court inMarshall v. C.I.R.stated: "In this day and age, there is no doubt that the use of private airplanes by executives in charge of large projects is a common practice." (Marshall, T.C. Memo 1992-65 (1992)).

InNoyce, the Court said the taxpayer incurred ordinary expenses when there was a clear business advantage and when the cost of replicating the travel schedule and the time savings via commercial charter would have exceeded the costs of operating a company aircraft. (Noyce v. Commissioner, 97 T.C. 670 (1991)). InE.W. Richardson, the Court stated that each of the other entities visited by taxpayer were a substantial distance away from the main office base and that, by maintaining the airplane, the corporation could provide the other entities with management, accounting, and legal support within a short time period. The airplane also enabled the corporation's employees to visit one of the other entities for part of the day and return to the home office for the remainder of the day or to visit more than one of the other entities in a single day. Based on the location of the other entities, the service provided and corporation's conduct of a management consulting service, the Court found that the corporation's maintenance of the airplane was an ordinary expense. (E.W. Richardson v. Commissioner, T.C. Memo 1996-368 (1996)).

Second, Expenses also must be necessary in carrying on a trade or business. (Section 162(a)). To be necessary, the use of the airplane by taxpayer for travel must be appropriate and helpful under the circumstances. (Marshall, 92-291). InMarshall, travel expenses with use of a personal airplane by a U.S. Air Force colonel was found to be necessary because use of the airplane was "appropriate and helpful" to petitioner in performing his duties of finding contractors for the U.S. Air Force. Specifically, the Court noted that use of the airplane provided the taxpayer with direct access to military airfields, allowed him to reach destinations on time, and enabled him to leave promptly after completing his assignment to report to work the next day. (Marshall, 92-291).

Third, to be ordinary and necessary the expenses must also be reasonable in amount. (Noyce, 687). Traveling expenses are deductible if they are reasonable and necessary in the conduct of the taxpayer's business and directly attributable to it. (Treas. Reg. Section 1.162-2(a)). However, it is unreasonable when expenses exceed the income earned or expected from the activity. (Edwards v. Commissioner, T.C. Memo 2002-169, 1108 (2002)).Depreciation of an airplane is not included in determining whether the amount of business expense is reasonable. (Noyce, 689).InNoyce, it was determined that although the aircraft cost approximately four times as much to operate for one person, replicating the schedule and time savings of petitioner's flights via commercial travel would have cost more than the cost of operating the aircraft.

In order to sustain its burden of proof as to the Ordinary and Necessary nature of the business expenses the taxpayer must maintain contemporaneous records which demonstrate the business purpose of each leg of each trip, including who was on board and the general nature of the meetings.

There is ample authority for the business use of private jets and the long lines and flight delays may move more and more business travelers to private jet travel.